Ok, now that we've gone over money management, let's turn and talk about the strategies for the $500.00 Challenge Accounts. The first one we'll talk about is the Sharebuilder / Long-term investing account. The question arises - when do we start buying some stocks? The better question is with limited funds - when will it be profitable to start buying some stocks? Where should our account balance be?
I generally suggest someone start out investing with about $30,000.00 to be adequately funded in the stock market. But our $500.00 accounts are not adequately funded. The Sharebuilder account is $29,870 short of that. That doesn't mean that it's impossible. It just means we have to think much differently when we start out. So let's go back to that $30,000.00 number and talk about some of the risk analysis principles that we went over last month. A primary principles states that we would risk about 3% to 5% on any one investment in the beginning. If we had a $30,000.00 account, this means we would risk around $1200.00 on any one stock purchase. Our commissions in the Sharebuilder account would then be less than 0.005% of our purchase.
As it is, let's look to our Sharebuilder account at the moment. We're not even close to $1200.00. But can we get closer to that number, and still make a return on our money? Let's see. At the moment we're only growing by 4.18% avg out 7-day yield. We haven't made any deposits to that account yet. For reasons I'll get into later, we'll start transferring money monthly into the Sharebuilder account when our futures account is around $800.00 balance. So how much will our Sharebuilder account need in it, before we start making purchases? Well, how much reward are we looking to? An 8% gain on our money would be extremely optimistic.
Let's say we are looking at an average $45.00 stock. Some stocks cost more, but some cost less. So let's look at $45.00 as our average entry price. Now don't forget, we need to think about taxes too. So it comes down to this - on an average, $45.00 stock, how many shares do we need to purchase, if we are hoping for a maximum of an 8% return?
$45.00 (RISKED) per share
$4.00 commission - We're only going to count the commission going into the investment. Because we are buying and holding for over 2 years. This is different from a trade. We're more concerned about our entrance with an investment, than our exit, if we exit at all.
8% gain - would be how much? An increase of $3.60 in the value of the stock price over commissions and taxes. Commissions and taxes are to be considered the cost of doing business.
Shares? - This means we would need to purchase about 15 shares, or $675.00. If we bought 15 Shares at $45.00 and the stock rose to $49.00? Then we've made how much? 15 * 4 = $60.00
$60 - $4 commissions = $56.00
$56.00 plus 15% tax on any dividends, etc.
We'd be looking at about a $50.00 gain on our $675.00 or close to our 8% goal. Actually, about 7%. But it's close enough for this very rough estimate.
So what's our goal before we make our first purchase with the Sharebuilder account? The ratio of about $680.00 account balance for a $45.00 stock is what we come up with. Bare minimum. There's a lot I didn't include in that equation. DRIP's (which we'll get into later) which add to both your valuation as well as dividend profit, and don't have any overhead cost. I didn't account for a sliding scale of risk, or my other money management probabilities. So there is some rough estimates. Needless to say, starting out our first goal for the Sharebuilder account before our first purchase is made? Is a minimum of $680.00. And don't forget, the entirety of the balance at that time would be made for 1 purchase. Does this violate our 3% - 5% of account size rule? Well, don't forget that we're going to be adding more money to this account, so not really. The account needs more capital to work with. More would be better. More is always better.
How are we going to get that 'more'? I'll discuss that in the next blog . . . .